Knowledge Center

Weathering the Storm: Managing through Tough Economic Times

The current global economic crisis is having a clear and significant impact on the nonprofit sector. While mission-driven organizations have seen mounting demand for their services and predict that the demand will continue to grow, they are also extremely concerned about the philanthropic environment and worry about how they will be able to support an increase in services with an expected decrease in revenue.

How can organizations deal with the strain presented by the current economic situation? First and foremost, they need to ensure that the organization remains financially viable during the economic downturn. Unfortunately, this will most likely mean staffing related changes because such costs represent about 70 percent of an average nonprofit’s budget. Throughout the process of reducing costs and downsizing, however, nonprofits need to ensure that the team remains strong and healthy, which means focusing on people and continuing to cultivate cultural elients. The following article will explore several of these strategies and best practices.Staff-Related Cost Reductions

Before turning to actual layoffs, many organizations work to trim costs around staff-related expenses such as compensation, benefits and administrative costs. All of the following measures represent regrettable and difficult choices that will virtually ensure employee dissatisfaction. Such options should ideally be communicated carefully and impliented seamlessly while helping employees to understand that sacrifices on behalf of all must be made to ensure that the organization can continue its work.

In rolling back budgeted compensation, new raises should be withheld first and that policy should be applied equally across all employees of the organization. The next consideration is to withhold any performance-related bonuses, which is most likely to impact the management and development teams, as these are the two groups with which bonus systems are most commonly used. Some consideration should be made of the potential inequity of such a decision and the risk of disappointing and de-motivating the two groups that are essential to navigating tough economic times. In general, however, these are also the two most highly compensated groups, so there may be more room to cut costs without directly impacting people’s ability to cover their core living expenses.

You may also consider an unpaid furlough, which means shutting down the entire organization with a forced unpaid leave for a period of days or weeks. Furloughs can be most easily impliented during periods of traditional organizational down-time such as holidays or summers slow-downs. Another way to accomplish a similar goal through a more drastic step is to institute an across the board salary reduction such as a five or ten percent decrease for all employees, which can be either time-limited or indefinite in scope.

Beyond direct compensation, many managers will review their benefit plans to ensure that they are only paying for essentials and getting the best benefits for their buck. Some groups will choose to phase out benefits that may be less important to their staff such as life insurance, long term disability, vision or dental. Others may downgrade their health insurance or consider switching to a different provider. Ultimately, the fastest and easiest way to cut benefit costs is to reduce the percentage that the company covers. By making a ten percent reduction in the employer contribution to health care, for example, you may only increase the burden for each employee slightly, while at the same time cutting aggregate organizational costs dramatically.

Talk with your employees to ensure that you have the best and most current information about which forms of compensation and benefits matter most to them and which ones are expendable. It may even be possible to convene a relatively large staff group and give them the challenge of cutting a certain amount of money from the benefits budget, making whatever allocations and trade-offs the group sees as most fitting. If employees feel engaged in the decision-making process, they may not be as upset with the realities of the decisions.

It is important to note than some plan restrictions and state and federal laws may impact which options are available to you and when. Minimum health care coverage legislation and plan open enrollment periods may be worthy of particular consideration. Speak with your HR experts and benefit managers to learn more about the available options.

Alternatives to Direct Layoffs

Before moving to layoffs, consider using a hiring freeze. Is your organization able to manage for the next six months, for example, with only the staff you have on board now? Can you commit to not making any additional hires, even if you experience resignations and turnover? This will require you to reallocate the work loads of departing employees, but may be a slow and easy means of reducing your staff size.

Another option to consider is part-time and flexible work arrangements. Are there staff members who would prefer to work part-time, either on a temporary or permanent basis? Or is there anyone on staff who is interested in taking an unpaid leave of several weeks or several months for vacation, travel, family time, consulting, or any other reason? If so, you may be able to work out deals under which people reduce their hours or have their jobs waiting for them when they return from leave. You may also consider officially terminating a full-time employee and hiring them back as an independent contractor if they are going to be working on a part-time and project-oriented basis. This will save on benefits expenses as well as payroll taxes, but make this move with caution as the IRS has strict guidelines regarding independent contractors.

It will also help with your budgeting efforts if you can find out sooner rather than later if people are planning to leave for any reason such as graduate school or relocation. This can be a difficult conversation to have, as you don’t want to give the impression that you are pushing people out the door or panic people who were not intending to leave. Nonetheless, the information gained through such conversations may be vital to you in considering whether or not more difficult staffing decisions need to be made.

Downsizing

Often as a last resort, you may need to engage in layoffs, which will require a series of important decisions about how many individuals must go, from what departments, over what time period, and ultimately, which specific individuals will be leaving. Often, such considerations involve a mix of financial necessities, strategic implications and performance-related evaluations.

Developing clear rationales and communication strategies for these decisions will be essential to protecting you from discrimination charges as well as internal and external push-back regarding your decisions. Expect that people will question every decision and expect clear and immediate answers from you. Determine how much you are willing and able to share about each decision in advance, and make sure that all leaders are sharing a consistent message.

It is important to think through the effects of every termination decision – on the organization as a whole, on the work flow of the affected departments, on external constituents, and on staff morale. Ensure that all of the details of the severance package and separation logistics are worked out in advance so that negotiation and awkward conversations are minimized. Remember that any former staff member becomes an ambassador for your organization and no matter how challenging the situation, trying to ensure loyalty even among those who are terminated can have a tremendous impact on your organization’s reputation.
People Matter: Strengthening the Organization

Although current financial realities may call for some tough decisions, do not forget that this is also the time to improve your organization and work to ensure its continued success. You want to come out of this difficult period as strong as possible, which among other things means keeping your top performers on board.

Key strategies in this regard include communicating clearly to instill confidence, providing leadership opportunities, and looking to your employees for innovative ways to streamline work and maximize impact. Keep employees informed about the ongoing situation and how the organization is faring. You want to be realistic but positive so that employees do not fear that they will be next on the chopping block, but so that they also are not shocked when cuts are announced. It is also vitally important that your key employees know how much you value their contributions and that you will do everything possible to keep them. You want to prevent your top performers from even considering looking for other opportunities.

There are two ways that remaining employees can view downsizing: either as a burden that means they have to do more work, or as an opportunity to take on more responsibility and have a greater impact. It is management’s role to ensure that top performers take the latter approach and view this as an opportunity to develop their skills. Giving people the chance to learn, grow, and lead in a new area can increase their commitment to your organization.

Difficult times are when organizations and leaders are tested most rigorously, but you can emerge successfully from these times by considering a wide range of options, being strategic in choices and priorities, making decisions when they need to be made, managing change carefully and maintaining carefully controlled messaging and open lines of communication. Not all organizations will be able to weather this storm and continue to serve their missions in the years to come. Those that do, however, have the opportunity to use this time to become more efficient and effective and to position themselves for continued growth and success when the economy rebounds.